Spain to amend constitution to set deficit limits

By: Patrick Blum | 26 Aug 2011

Spain’s main political parties have agreed to set constitutional limits on public deficits and debt with the structural deficit to be capped at 0.4% of GDP from 2020. The change must be approved by June 2012 at the latest.

A constitutional amendment making the change possible will be accompanied by a law limiting the central government’s structural deficit to a maximum of 0.26% of GDP and the deficit of regional governments to no more than 0.14%.

Local governments will be required to present balanced budgets. The law will also set the criteria for the gradual reduction of the country’s debt to bring it into line with the eurozone’s growth and stability pact by 2020.

To allow for some flexibility in case of crises, the agreement can be revised in 2015 and 2018.

The move follows calls by Germany and France for Spain to set binding limits on its deficits to help it regain the trust of investors. There have been widespread concerns that Spain would need a bailout similar to Greece to rescue its economy.

The agreement has met mixed responses with some analysts saying it leaves the door open to too many exceptions and possible changes in the future. Others welcomed the agreement saying it would help reassure markets as the proposed changes would apply to both central and regional governments.

The government has introduced tough austerity measures to curb the public sector deficit which reached 11.1% of GDP in 2009, one of the highest in the eurozone. It also pushed through a raft of financial and labour market reforms to help to bring the economy back into shape and calm markets. The public deficit is expected to be around 6% of GDP this year and the government has said it wants to bring the budget deficit down to 3% of GDP by end-2013.

The euro rose after the announcement though Spanish debt prices were little changed, news agencies reported.